Does austerity work

[Efour]

Stewski and Dolph.

Still makes an interesting read.
Btw are either of you two qualified in economics some way or just heavily self interested as well?

 

[Dolph]

Not sure what you mean by the bold statement above? See graph below from that source.

Unless you want to consider going back pre war, then spending has been pretty consistent since the end of the 2nd world war.

The key part was that the distribution has changed since the time you want to emulate. Would you support the cuts to welfare and health spending required to get better returns on state spending?

I'm not sure that you can easily separate "investment", "welfare" and "Day to day" as your statement implies.
If you are asking should we continue to cut state workers such as police/health/fire etc for supposed (but not materialised) gains I can't see that as a likely wise decision.
My broad understanding of keynes contribution was to consider the value of a mixed economy which involves state investment / stimulation for private investment.
As time magazine points out this may include money the state doesn't currently have. Obviously wasted money is wasted money, another 12Bil for an NHS patient record built by private companies for a state system is not likely desirable, years late, seemingly no clause in contracts for over budget and deadline, no recourse to those in government or business making the deal, unlikely it was wise.

Most of our current spending isn't investment, that's the key point. When the approach you advocate was in use, the spending approaches were different, and the economy was still generally in surplus, not deficit.

view of the magnitude of the issue (notwithstanding huge disparities in the CVs of the 2 at the time) it seems a bit odd to take this position.
I don't think Cable a saint or prophet or even strongly aligned with my political thoughts, he was/is likely to the right of the Lib Dems, he had the good sense and education/experience to see how far we had moved away from Keynes (including in his own opinions actions before the crisis) and suggest we re read some recent history right around the time of the crisis.

Cable wasn't to the right of lib dems politicians, perhaps voters, but a great many lib dems voters in 2010 didn't see to have a clue what the stated position of the party was on most things, so that probably isn't a good indicator.

I'm not convinced a single change in a single country gave us "innovative banking" complete with fake "good" debt. On a small scale I (and others) observed the change as my partner worked for an international bank. Her section was not sales orientated, but much of the language and behaviour became "product", mostly focused on debt, bonuses given to individual sales people before and without thought of the probability of repayment, with virtually zero external oversight.

Though ahead of the curve on the risk of such economies, I wouldn't be surprised if Cable favoured "light touch" regulation too (until the crisis where unlike Osborne he waded in on banking). After Thatcher and Regan moved us away from Keynes to Friedman, we ended up where even the supposed "new" Labour party were following Alan Greenspan and laissez faire economics. Hopefully we've all learnt the lesson that the market doesn't always decide for the better of all, actually in many areas, the less regulation the more we live in something like a jungle.

Customer lending wasn't really the issue in the UK though. The UK banks didn't generally have a default problem, they had liquidity problems when the markets became more risk averse due to default issues elsewhere.

Also note I asked about the public spending crisis, not the recession or banking crisis. The public spending crisis was caused by excessive public borrowing and spending at the wrong point in the economic cycle...

Those people and the thinking that took us to that point, should no longer be involved in shaping our future!

Google says these are quotes from Keynes:


By the way I'm not saying Follow Keynes and we'll all live happily ever after. At least now we can start to discuss the proven value of investment and the limits of cuts when considering the performance of the economy!

I'm all for that discussion, but first we need to be clear that state spending and state investment are not interchangeable.

 

[stewski]

Stewski and Dolph.

Still makes an interesting read.
Btw are either of you two qualified in economics some way or just heavily self interested as well?

I read a little on my I.T. degree for the business/marketing modules, it's the misuses area really, as she bothered to finish her economics degree (first time around) and got her second in business banking, before I'd got my first.

Not sure my academic background is as strong as George Osborne's 2.1 in modern history for economic questions, especially as my focus is technology! Pretty sure neither are as relevant as being an economics lecturer, chief economist for a multinational, published and an advisor to the Kenyan government.

 

[stewski]

Unless you want to consider going back pre war, then spending has been pretty consistent since the end of the 2nd world war.

The key part was that the distribution has changed since the time you want to emulate. Would you support the cuts to welfare and health spending required to get better returns on state spending?

Before I answer, can you explain how you simultaneously bill a banking collapse as the UK public spending crisis and then say public spending in the UK hasn't changed much since before the war?

 

[Dolph]

Stewski and Dolph.

Still makes an interesting read.
Btw are either of you two qualified in economics some way or just heavily self interested as well?

Educational background is science (specifically chemistry), employment background is statistics, databases and big data, so interested in economics because numbers.

The problem with appealing to qualifications is that it tends to be done referencing people you already agree with. You don't see stewski posting about the Nobel prize winning, way more qualified than the people he keeps highlighting, Milton Friedman for example, because he disagrees with him, and he is instead trying to improve his argument through use of a fallacy, rather than genuinely advocating views based on the qualifications of those who hold them.

 

[Dolph]

Before I answer, can you explain how you simultaneously bill a banking collapse as the UK public spending crisis and then say public spending in the UK hasn't changed much since before the war?

The banking collapse caused GDP to drop, what made that so problematic was that spending had been growing with GDP during the boom, rather than shrinking as Keynes would recommend, so when the bust came, the're was no overhead to stimulate.

The banking crisis was the latest in the cycle of boom and bust, and while preventable in itself, the bust part of the cycle is not avoided, you can just change the trigger.

The public spending crisis, on the other hand, was entirely avoidable, and was the result of bad fiscal policy. If we had gone into the banking crisis having been reducing the debt, rather than growing it significantly in the preceeding 5 years, we would have been in a much stronger place to stimulate the economy through increasing state spending to counter the private slowdown.

 

[Randomface74]

Surely no one here is affected by austerity? Everyone has spare cash for cutting edge technology right?

There's more to it. For example...
If you think the government needs to reduce the national debt, it needs to do all of the following:
- reduce spending
- raise taxes
- raise inflation
If you expect more of all of these...
- If you rely on government spending then you might lose out. That might be benefits, or it might just be that your job is publicly funded.
- If you are well off you're more likely to be subject to increased taxes. Most people in the higher income tax bracket already resent it.
- If you have a cash stockpile, inflation will devalue it. So you're forced into spending/investing it at a time when most asset classes seem risky.
My point is that pretty much everyone is affected one way or another.
The debt is so large that it can't really be reduced without affecting anyone.
And if we don't take any action, we end up bankrupt, and then it affects everyone much more than austerity.

 

[stewski]

The banking collapse caused GDP to drop, what made that so problematic was that spending had been growing with GDP during the boom, rather than shrinking as Keynes would recommend, so when the bust came, the're was no overhead to stimulate.

The banking crisis was the latest in the cycle of boom and bust, and while preventable in itself, the bust part of the cycle is not avoided, you can just change the trigger.

The public spending crisis, on the other hand, was entirely avoidable, and was the result of bad fiscal policy. If we had gone into the banking crisis having been reducing the debt, rather than growing it significantly in the preceeding 5 years, we would have been in a much stronger place to stimulate the economy through increasing state spending to counter the private slowdown.

I'm still not sure how anyone can claim spending as a percentage of GDP has been the same since WWII ie 65+ years and we had a public spending crisis more important than the near collapse of banking/money/capitalism?

 

[stewski]

There's more to it. For example...
If you think the government needs to reduce the national debt, it needs to do all of the following:
- reduce spending
- raise taxes
- raise inflation
If you expect more of all of these...
- If you rely on government spending then you might lose out. That might be benefits, or it might just be that your job is publicly funded.
- If you are well off you're more likely to be subject to increased taxes. Most people in the higher income tax bracket already resent it.
- If you have a cash stockpile, inflation will devalue it. So you're forced into spending/investing it at a time when most asset classes seem risky.
My point is that pretty much everyone is affected one way or another.
The debt is so large that it can't really be reduced without affecting anyone.
And if we don't take any action, we end up bankrupt, and then it affects everyone much more than austerity.

This still seems simplistic and increasingly discredited thinking, business growth relies on services and infrastructure too, trimming back isn't ideologically wrong but no roads no goods, rise in crime costs, low education costs, unemployed police cost!

As a technologically advanced island we should be at the front of renewable energy scientific development!

 

[stewski]

Educational background is science (specifically chemistry), employment background is statistics, databases and big data, so interested in economics because numbers.

The problem with appealing to qualifications is that it tends to be done referencing people you already agree with. You don't see stewski posting about the Nobel prize winning, way more qualified than the people he keeps highlighting, Milton Friedman for example, because he disagrees with him, and he is instead trying to improve his argument through use of a fallacy, rather than genuinely advocating views based on the qualifications of those who hold them.

Actually I've mentioned Milton Multiple times and many times more than you in this thread, I'm pretty sure https://en.wikipedia.org/wiki/Alan_Greenspan is well qualified too and followed much of Friedman's teachings. Have a read of how his world view changed in 2008:
https://www.theguardian.com/business/2008/oct/24/economics-creditcrunch-federal-reserve-greenspan

"I have found a flaw," said Greenspan, referring to his economic philosophy. "I don't know how significant or permanent it is. But I have been very distressed by that fact."

It seems like the note from the top hasn't filtered down yet?

 

[Randomface74]

This still seems simplistic and increasingly discredited thinking, business growth relies on services and infrastructure too, trimming back isn't ideologically wrong but no roads no goods, rise in crime costs, low education costs, unemployed police cost!
As a technologically advanced island we should be at the front of renewable energy scientific development!

So how else would you reduce the national debt?
Or would you just not?

 

[Rroff]

Stewski and Dolph.

Still makes an interesting read.
Btw are either of you two qualified in economics some way or just heavily self interested as well?

Not exclusive to this field but I often find those with a significant academic background in economics become further and further removed from the human element and often more and more driven by either or both ideology and/or hard numbers and ultimately for it to work ultimately you have to balance the theories with the human element.

I've watched quite a bit of Youtube videos of a couple of different "great" economists who've at times people say should be the Chancellor, etc. some of them very vocal about how various theories would work and how they would fix things but can't seem to see the realworld factors that would be working contrary they'd also have to contend with.

 

[stewski]

So how else would you reduce the national debt?
Or would you just not?

Once you couch the discussion in a quick fix of either/or, you probably shouldn't be in the discussion. Having dropped from 2nd to 7th in the G7 by economic performance it seems reasonable to suggest the last decade was handled badly and that the cuts have (by Osborne's own measures) failed to achieve their targets.

Finding/developing natural resources, stimulating an economy and encouraging business to also invest, changing the value of your currency, this is not like paying off a credit card. Clearly our world standing affects our credit rating, our GDP affects our ability to service the interest on our debt. Others have invested better and cut more wisely.

Dolph isn't wrong to ask about how to distribute the cash we have, but it is wrong to suggest (as many have) it unthinkable to borrow to invest/grow your way out of tough economic times obviously it depends what it is being invested in, the time to show return on investment, short and long term effects but as a principle it has worked for a number of economies.

 

[Dolph]

I'm still not sure how anyone can claim spending as a percentage of GDP has been the same since WWII ie 65+ years and we had a public spending crisis more important than the near collapse of banking/money/capitalism?

I'm going to apologise and backtrack a little, tax take has been broadly the same, spending has not, at least, not in GDP terms, my apologies. The point about changing composition still stands though.

As for making a distinction between the banking collapse and the public spending crisis, they are different problems with different solutions. The banking crisis did not cause the poor state of our nation's finances, it just exposed it, but it was not a surprise, take this from 2004 , for example.

http://news.bbc.co.uk/1/hi/business/3412495.stm

Our ability to respond to the banking crisis was damaged by poor fiscal policy prior to it, and our ability to delude or lie to ourselves that we were cutting back when we actually weren't, further compounds the issue. I say again, we did not have austerity in the UK.

 

[Dolph]

Once you couch the discussion in a quick fix of either/or, you probably shouldn't be in the discussion. Having dropped from 2nd to 7th in the G7 by economic performance it seems reasonable to suggest the last decade was handled badly and that the cuts have (by Osborne's own measures) failed to achieve their targets.

Finding/developing natural resources, stimulating an economy and encouraging business to also invest, changing the value of your currency, this is not like paying off a credit card. Clearly our world standing affects our credit rating, our GDP affects our ability to service the interest on our debt. Others have invested better and cut more wisely.

Dolph isn't wrong to ask about how to distribute the cash we have, but it is wrong to suggest (as many have) it unthinkable to borrow to invest/grow your way out of tough economic times obviously it depends what it is being invested in, the time to show return on investment, short and long term effects but as a principle it has worked for a number of economies.

We haven't cut anything. We slowed the rate of growth from the plan, that's not the same thing. Going back a few pages, I posted graphs of our spending and Portugal's, Portugal did austerity and cuts we did not. This may seem like a minor thing, but you can't portray a method as failing when we didn't actually do it.

Note that I am not saying we should have actually cut spending, because I don't think we should have, as I have already said. I would have preferred us to be in a position where we had been reducing our debt during the boom, and therefore had plenty of headroom to stimulate during the bust, but we didn't.

What we did didn't work very well, but we started in a very bad position.

 

[No1newts]

What are the views on austerity here at gd? Has it worked or would we have been better investing like they have in Portugal or the USA?

It depends on too many factors to say it will or won't work in advance.

Ultimately you are looking to reduce your debt so you either cap spending (thus loans) to rein it in or you spend to generate tax receipts to reduce debt.

Neither is nevesssrily right or wrong but in the specific instance we have dealt with I would say austerity has failed as debt has grown massively still as receipts have fell of a cliff and I think it will be a longer road to recovery than we would have faced.

Who knows though.

 

[StriderX]

I'm not sure there's much wrong with running a deficit that your GDP growth is helping to erase regardless is a bad thing, was it bad in 2007 and the preceding years... well yes. But a tiny amount of people saw what was coming and no one believed them (some of them being shock jocks doesn't help), so it's hardly like you can truly blame a government for spending within it's means (yes GDP growth+expenditure is within means).

The problem is always going to be, knowing what to spend your money on to get it back again down the road and increase GDP growth at the same time, this countries government is woefully **** at this.

 

[Dolph]

It depends on too many factors to say it will or won't work in advance.

Ultimately you are looking to reduce your debt so you either cap spending (thus loans) to rein it in or you spend to generate tax receipts to reduce debt.

Neither is nevesssrily right or wrong but in the specific instance we have dealt with I would say austerity has failed as debt has grown massively still as receipts have fell of a cliff and I think it will be a longer road to recovery than we would have faced.

Who knows though.

Both the US and Portugal did austerity, we did not. If we are going to discuss it we need to talk about what actually happened, not what we think happened.

USA, set to 10 year to see the post economic crash spending profile

https://tradingeconomics.com/united-states/government-spending

Portugal

https://tradingeconomics.com/portugal/government-spending

UK

https://tradingeconomics.com/united-kingdom/government-spending

We didn't cut anything, the USA and Portugal did. They are not a lesson in avoiding austerity, we are.

 

[StriderX]

Wait nvm, oopsy.

 

[stewski]

Both the US and Portugal did austerity, we did not. If we are going to discuss it we need to talk about what actually happened, not what we think happened.

USA, set to 10 year to see the post economic crash spending profile

https://tradingeconomics.com/united-states/government-spending

Portugal

https://tradingeconomics.com/portugal/government-spending

UK

https://tradingeconomics.com/united-kingdom/government-spending

We didn't cut anything, the USA and Portugal did. They are not a lesson in avoiding austerity, we are.

Well when you say we didn't cut anything, are you talking about 10s of thousands in the police force not having been given their marching orders, or are you talking about government cuts to frontline services failure to save the government as much money as predicted?